x Abu Dhabi, UAE Thursday 20 July 2017

Dubai Financial Market milestone as Federal Reserve buoys sentiment

The DFM has now climbed 99.9 per cent this year, making it the second best performing index behind Venezuela’s stock market index, as the Fed announces scaling back its US$85 billion a month stimulus.

The DFM's gains have now reached 99.9 per cent this year. Christopher Pike / The National
The DFM's gains have now reached 99.9 per cent this year. Christopher Pike / The National

Dubai’s bull run hit another milestone yesterday as the main stock measure doubled since the start of the year.

Shares advanced again after the America’s central bank’s decision to taper its US$85 billion a month stimulus, bringing year to date gains to 99.9 per cent.

Sentiment was buoyed by the United States Federal Reserve’s redoubling of its commitment to keep interest rates at record lows for some time.

“Investors have had quite some time to consider the beginning of the end of quantitative easing and so this is not a shock. Also, the flip side of the taper is slightly better economic growth, which is ultimately what investors want to see,” said Hasnain Malik of Frontier Alpha Research, a business and political research company based in Dubai.

The Dubai Financial Market General Index edged 1.11 per cent higher to 3,243.42. It has now climbed 99.9 per cent this year, making it the second best performing index behind Venezuela’s stock market index. The Abu Dhabi Securities Exchange General Index closed up 1.09 per cent at 4,139.22. It is the third best performing index this year, with gains of 57.3 per cent.

Markets in Asia and Europe also moved higher.

The positivity was in contrast to the fretting by local and global investors in recent months about when the Fed would begin to unwind its economic support plan, rolled out following the global financial crisis.

On Wednesday, the Fed said it planned to whittle down its quantitative easing to zero by the end of next year. Starting next month, it would trim $10bn a month from the programme.

Although the timing of the announcement surprised some observers, the Fed has signalled in recent months that it was preparing to unwind its bond-buying scheme.

The US dollar received a lift, climbing as much as ¥104.37 and the euro slid back to $1.3667. Oil prices slipped, with North Sea Brent crude losing 21 cents to $109.42 a barrel.

“We expect limited negative economic implications for the GCC once the US starts scaling back its asset-purchase programme, especially in an emerging markets context given their strong current account surpluses,” said Monica Malik, the chief economist of EFG-Hermes, the Egyptian bank. “However, we see the Fed tapering contributing to a lower oil price in 2014, with a stronger US dollar outlook.”

The Fed’s governing committee cited strong employment growth as a factor behind its tapering announcement. It forecast the jobless rate would drop to 6.3 per cent next year from its current level of 7 per cent.

In a bid to soften the impact of its decision, the central bank offered more guidance on when it would begin to raise interest rates.

It kept its unemployment threshold unchanged at 6.5 per cent but stressed it would be appropriate to keep rates at near zero “well past” the time when the jobless rate did drop below that level.

Tim Fox, the chief economist of Emirates NBD, said the first rate increase was likely to be in 2015.

That could reverse the cheap borrowing governments and companies in the GCC have benefited from since the global downturn as policymakers have mirrored the loose monetary policy of the US.

“We expect global long-term rates to move upwards, especially in the GCC where the currencies are pegged to the US dollar, resulting in widening credit spreads, steepening yield curves, though Libor rates should remain low,” said Jaap Meijer, the executive director of equity research at Arqaam Capital, the investment bank.

tarnold@thenational.ae